Hidden debt that no one is talking about (And it involves you)

There's a paradox when it comes to debt in Australia. We have endless debate about the magnitude of the government's borrowings, even though they are comparatively low by global standards. Meanwhile, the level of household debt gets relatively little attention even though it's among the highest in the world. In the past two decades the debt owed by households has risen from about 80 per cent of combined income to more than 180 per cent. A fresh surge in borrowing driven by the recent boom in house prices, coupled with slow wage growth, has pushed the debt-to-income ratio to new heights.

When economist Kieran Davies last year compared countries using another measure – the ratio of household debt to gross domestic product – he found Australia's to be the world's highest, just above Denmark, Switzerland and the Netherlands.

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About 85 per cent of household borrowings – which include mortgages, credit cards, overdrafts and personal loans – are owed to Australian lenders, mostly banks. The Reserve Bank pointed out recently that a small but fast-growing proportion is owed to Australian governments – mostly university-related HECS/HELP debt – and to overseas banks and governments, which is mostly owed by recent migrants.

Household surveys by research firm Digital Finance Analytics have found more than one in 10 owner-occupiers would have difficulty meeting their mortgage repayments if interest rates were to rise by just 1 percentage point from their current historic lows.

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Martin North, the principal of Digital Finance Analytics, says it's not just low-income households that are exposed.

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"My reading is that overall the market is OK but there are some significant pockets of stress even in this low-interest rate environment," he said. "But those pockets are not necessarily where you would expect the risk to be, it's not just western Sydney for example. Some quite affluent people who have taken out very large mortgages are more leveraged and therefore more exposed if interest rates were to rise."

One striking trend going largely under the radar is the dramatic shift in customers using short-term loans from so called "payday lenders" following regulatory changes in 2013 and advances in information technology.

In the past, payday loans were typically used by those on very low incomes in financial crisis. But a growing share of these loans – now called "small amount credit contracts" – are being taken out by those in higher income groups.

Philip Johns, the chief executive of National Credit Providers Association which represents the small-amount consumer-lending industry, said an "ever-increasing percentage" of full-time workers are using these products.

A key factor in this shift is the convenience of being able to obtain a small loan quickly online. Big players in the sector, such as Nimble and Money3, have also increased their profile through advertising.

The industry says the total value of "small-amount credit" advanced to consumers grew from $554 million in 2013-14 to $667 million in 2014-15.

Analysis by research firm CoreData​ for the industry shows nearly show half the small-loan contracts are taken by women. While this data shows the proportion of women borrowers has been stable for the past two years, household surveys conducted by Digital Finance Analytics show the share of payday loans taken by women grew between 2005 and 2015.

"It's a change in the type of person borrowing and it's a change in the channel through which they are borrowing," North said.

"Payday lending is no longer just used by those distressed households in very low socioeconomic groups without a mortgage and maybe reliant on Centrelink​ payments. It's a much broader spectrum of people now taking these loans."

I wonder what our economic guardians at the Reserve Bank make of that trend?